Friday, December 28, 2007

Capital Gains rule changed for married joint-filers

Most homeowners know that you can claim capital gains tax-free of up to $250,000 for single-filers and up to $500,000 for married joint-filers, so long as you have occupied your home for any of two of the last five years. But when a married homeowner dies and leaves his/her spouse with the house, what the IRS has been "enforcing" until now has not exactly been fair or easy to deal with, especially in the midst of a grieving period.

With Congress' final tax bill of 2007 being passed, this has been changed for the benefit of the surviving spouses. They now have up to two years to claim the full $500,000 exemption.

Prior to this bill, the spouse could only claim the full $500,000 gain in the year that a joint return was filed. So the property would have to be sold by the end of that calendar year in which the the death occurred, and if it happened late in the year that would make for a difficult haste to get the house sold. Not something likely to be high on the priority list of a grieving spouse.

Home price declines accelerating across the nation

The closely watched Standard & Poors/Case-Shiller Home Price Indices were released on Wednesday, revealing the 10th consecutive month of negative annual returns and the 23rd consecutive month of decelerating returns across the nation.

This highly regarded analysis of real estate values for 20 of the largest metro areas in the U.S. uses a repeat-sales methodology, unlike the National Association of Realtors which uses median values for its ultimately skewed figures. The Case-Shiller method eliminates "non-arms length" transactions and other questionable data points to create their indices.

Prices are down 6.7% annually for their Composite-10 and 6.1% for the Composite-20, using data through October of 10 and 20 of the largest MSAs, respectively. The 6.7% annual drop is the largest in the 20 years the Case-Shiller indices have been calculated, with the previous being 6.3% in April 1991.

On a monthly basis, prices fell 1.4% for both indices - the largest monthly decline in over seven years. Only Portland, Charlotte and Seattle have positive annual gains through October, but all three are experiencing accelerating monthly declines. Eleven of the 20 MSAs recorded their largest monthly decline in 20 years in October. That just cannot be good when it's spread across all regions of the country.

The San Francisco MSA (San Francisco, Marin, Alameda, Contra Costa and San Mateo counties) revealed a 6.2% annual price decline with a 2.1% drop from September to October.

Some of these negative records should be broken in the coming months and year. Stay tuned as the Case-Shiller indices will be closely monitored right here. And if you are a betting man or woman, you can even put your money where your mouth is by buying housing futures or options on futures via the Chicago Mercantile Exchange using these same indices. Now there is a platform to bet on the rise and fall of real estate values without actually owning real estate.

What a country.

Monday, December 24, 2007

Just another good reason to pursue short sale opportunities

On December 20th Congress passed and GW signed the "Mortgage Forgiveness Debt Relief Act" much to the liking of short sellers and would-be buyers alike. This now prohibits the IRS from demanding income tax payments from homeowners who sell their property for less than the amount owed i.e. a short sale. Prior to this legislation, which goes into effect immediately, sellers would be hit with a tax bill based on the amount forgiven by their lender. The lender was required to file a Form 1099 with the IRS to alert it of the home seller's forgiven debt, which was treated as income, which seems strange as it was never actually received by the home seller. Talk about no mercy.

This long-awaited change is a positive for both sellers and buyers/investors as it removes a large hurdle to consider for struggling homeowners who need to sell, and investors who are potentially wasting time with people who might not end up selling due to the tax implications.

A rare win-win.

Friday, December 21, 2007

Bay Area sales numbers plummet; prices mixed but mostly down

If leading indicators mean anything to you - and they should - then the Bay Area took another big step in November in the wrong direction (for sellers and owners anyway).

DataQuick's November report shows a 20 year low in sales volume for the month at 5,217 sales - almost 800 fewer sales than the previous low in 1990. This is down a sharp 36.2% from 8,042 sales in November 2006. And sales have decreased on a year-over-year basis now for 34 consecutive months. It remains yet to be seen just how big of an impact the credit crunch, and specifically the jumbo sector, has had on recent numbers. Notwithstanding can anyone say "trend"?

Prices are already coming down across the board from recent peaks - from a 21.9% drop in Solano County to a 2.4% decrease in San Francisco, which has shown the most stability thus far. The median price for the nine-county Bay Area region is down 5.4% to $629,000 from its peak of $665,000 in June and July of this year.

Hang on for an interesting 2008, kids.

Wednesday, December 19, 2007

Update on 721 Rosal in Oakland

Jump here for the update on this interesting home in the Crocker Highlands district of Oakland.

Are Fed's proposed ideas to regulate lending industry any good? Actually... maybe

The Federal Reserve is proposing numerous changes in lending practices to cut down on questionable underwriting and protect people from lenders, and quite frankly, themselves. Most of the ideas make sense, but they are dependent on implementation and then enforcement. The key topics are as follows, along with my thoughts, of course:

Prohibit giving people unaffordable loans.

This has good intentions as the jist of it is to qualify buyers' affordability based on the reset rate of an ARM, and not on the teaser/introductory rate. Now, my question is what are they going to consider the threshold of "affordability" and will it be an appropriate benchmark? Reserving final judgment for that.

Restrict use of "liar" loans.

I have mixed feelings on this as it will do some good and some harm to unintended recipients. Yes, many buyers used this product and gladly paid the slightly higher rate to get more house than they should have during the boom. But this product is also the only option for many newly self-employed professionals, so this could cut many of them out of the picture unintentionally. Again, good intentions by the Fed with this.

Prohibit or limit prepayment penalties.

This is a no-brainer and good for all buyers and owners. Just another clause that guaranteed higher fees or a prolonged higher rate for lenders.

Curb or better disclose broker incentives.

Another strong proposal from the Fed, if implemented this should prevent or limit brokers from increasing your rate above what you should qualify for. This is a direct attack on what is known in the mortgage industry as the "yield spread premium" - fairly self-explanatory - and pays said broker a nice premium for jacking up your rate.

Require or encourage escrowing of taxes and insurance.

Not a terrible idea, but I am one who does not like to give anyone an interest-free loan at any time, and that is what this is. My simplified take is this: if you are responsible enough to be able to purchase a home - and assuming all of these other rules whittle that down to a qualified pool - then you should really be able to manage your finances and pay your insurance and taxes when they are due, no matter when that is.

Prohibit coercion of appraisers.

This one has been attacked already in California with the passing of SB223 in November, making it a federal crime to coerce an appraiser. Might as well make it a national/federal crime.

Prohibit loan servicers from engaging in unfair practices.

This deals with the administrative angle and general customer service. Basically, credit the customer's account the day the payment comes in, and don't double- and triple-charge for the same late fee more than once. Wait... is this a wireless phone bill we are talking about? Next.

Require better disclosure overall.

Though vague and generalized at this juncture, this is a necessary attack on the incomplete and misleading mortgage advertisements we have all heard, seen, or read. If you have ever turned on the radio in the Bay Area, you most certainly should have heard Wesley Hoagland of Lenox Financial touting his 1% loans with no closing costs, free appraisals and the fact that it is "the biggest no-brainer in the history of mankind." Seriously.

These proposed changes are apparently open to public comment for 90 days, at which time the Fed will review comments and then make decisions on implementation. Overall, I have to say it's a good start, but it's too little too late for this phase of the real estate cycle/credit meltdown. They are basically working on what will transpire in 5-10 years from now.

Tuesday, December 18, 2007

Marin mansion to set record with $65M sale

Locksley Hall on the island of Belvedere in Marin County is under contract for the full asking price of $65M, and is set to close escrow in January. This is believed to be a record sales price in Northern California.

Not a bad "fixer upper" investment for the owner who purchased the property in 1995 for $5.5M and then sunk $32M in renovation costs. The rich get richer...

Monday, December 17, 2007

I surely don't feel sorry for these investors

The cover article in Sunday's Chronicle about investors losing homes to foreclosure reads like a poor attempt by its authors aimed at sympathy for these so-called "investors." We will be having none of that around here. These people thought the market could never go down and it didn't matter if rents could not cover their holding costs - they would more than make up for it with continued insane appreciation!

For those of us who did get out in time, we can actually thank some of these investors for helping accelerate the run-up in prices. So to those of you who helped to increase my capital gains, I thank you now.

These numbers are only beginning to materialize here in the Bay Area and it is a matter of time before pre-foreclosure, short sale and finally, foreclosure listings, are everywhere. San Francisco seems to be the last place that is holding up and very well might do better than most in coming years, but it isn't "insulated" as many like to suggest.

Saturday, December 15, 2007

Getting bleaker by the day

While I feel strongly about the Bay Area housing market becoming a strong one for buyers in the coming years as prices decline sharply in nearly all local markets, I have tried to remain optimistic that the economy will slow slightly, yet remain in tact. But the more reports and statistics I read, the grimmer things look for the financial system overall. Yes, markets run up to an unsustainable level all the time, and then pull back for a correction. Nothing new there. But this latest run-up puts us in uncharted territory - combining 40-year-low interest rates with the loosest underwriting standards in the history of lending. Did you really think Richard and Suzie down the street should have "qualified" for that $1M mortgage when they earn a combined $130k/year? It didn't add up then, and it doesn't add up now. And the fallout is underway. The severity of it is what no one can put their finger on. But many are starting to really get worried about how bad it just may become, including yours truly.

Check out this column by Paul Krugman in this past week's New York Times on why the Fed's latest attempts to rescue us from all this just might not work.

Wednesday, December 12, 2007

The real agenda with the Bush foreclosure plan

You think the current administration really cares about the homeowners in danger of foreclosure? I. Think. Not... Am I surprised, and should you be? Hell. No...

See details here and what Treasury Sec. Henry Paulson revealed.

Tuesday, December 11, 2007

Sub-prime mess = Crack cocaine?

An interesting comparison from the District Attorney of Brooklyn, NY.

Leamer says no recession..... for now

What do I think? I am on the fence on this one.. seriously. I have much respect for Leamer and his work at UCLA and feel strongly that his Anderson Forecast team is more impartial than any of the big brokerage houses' anaylists (ya think?). But the recession call is still too early to call. It's close, but it's still too early. The election year of '08 will answer nearly all of the questions about where this country is headed in the next several years, both politically and economically, which can be one and the same.

We know that home sales and pricing will fall in '08, and foreclosures will continue to rise, but the employment numbers and interest rates in the first part of the year will dictate where we go. Hang on for an interesting ride...

Read this to see what he says about California specifically.

Monday, December 10, 2007

Current rates, volatility and the rate freeze

Check out RPM Mortgage's Julian Hebron's weekly rate overview:

My lock alert last week proved effective, as extreme volatility continues. Fixed and ARM rates opened this week .375% to .5% higher than last week. Last Wednesday, mortgage bond yields (that lenders look to for rate pricing) were at 2-year lows, and today bond yields (and ARM but not fixed rates) are at the highest levels since the peak of the credit freeze in late-August—all of this in 4 trading days. Because of this and reasons I discuss below, I think the rates below will drop.


When the Fed announces their rate decision tomorrow at 2:15 Eastern, I think they’ll cut the Discount Rate, a 1-to-30-day rate the Fed charges global banks for short-term loans in times of distress, by 50 basis points (.5%). This will bring the Discount Rate to 4.5%, which should finally start to mean something to cash-strapped money center banks (like UBS, Citi just this week) that continue to post bad debt write-offs. Until now, the Discount Rate hasn’t been low enough to be better than other options, but at 4.5%, it may be.

The Fed Funds Rate, a rate Federal Reserve banks charge each other for overnight loans, will likely be cut 25 basis points (.25%) to 4.25%, although many believe it could be a 50 basis point (.5%) cut given Fed Chairman’s November 29th acknowledgement that “current stresses in financial markets make the uncertainty surrounding the [economic] outlook even greater than usual.”

But bond trading, which takes cues from Fed rates, certainly doesn’t show expectations for 50 basis points. Friday’s jobs report showed the steepest wage growth in 2 years, which stoked inflation fears and led to a bond selloff that continued into today. This Thursday and Friday, there are 3 critical inflation reports. If the Fed Funds cut is 50bps (downward rate pressure) and inflation comes in higher (upward rate pressure), fasten your seatbelt for more rate swings.


When a deal is close to being real (e.g., when purchase offers are going out), I give definitive quotes. But on actual execution of rate locks, I’m taking more of a trader’s approach to capture opportunities amidst the volatility. With day-to-day rate swings of .25% or more, and economic fundamentals that point to lower rates over the next 25-60 days, I can (and do) capture rates on any single trading day that are better than any 25 to 200 day moving average rate. Especially lately, I've been able to capture better than the quoted rate.


A client told me Saturday night that a couple he knows – Jumbo A-paper borrowers with 20% equity, perfect credit, and high-paying jobs – were adamantly defending the stance that they’ll qualify to get their 5yr ARM from 2004 frozen. This profile couldn’t be further from qualifying, but it proves how confusing and disruptive to lender underwriting operations this rate freeze will be. You multiply this couple by thousands who will clog up the system “just to see” if they can qualify, and it spells trouble.

In short, I think it’s mostly political rhetoric that has just enough credibility to come in handy during an election year. Picture your candidates stumping, and referencing the one case their assistant dug up as a success story. It might get headlines and votes, but it doesn’t unwind this housing correction any faster. I’m certainly sympathetic to borrowers who are in distress; I’m in the trenches with them daily. But government intervention in free markets is unwise and will probably prove to prolong this correction.

Are mortgage rates poised to begin their incline?

Check out the Realty Times Interest Rate Update. What do you think? Time to lock in now if you are a buyer?

Berkeley fixer a stones throw from Solano Ave Zachary's

This spacious bungalow sits on a nice corner lot in a great neighborhood known as Thousand Oaks where you can actually see the backside of Zachary's pizza up the street. With a little work and sweat equity, this 1265 sq ft, 2 bed/2 bath home can be brought back to life. Based on the high amount of interest at the open house and fab location, I expect this to sell quickly and likely above asking price.

I predict a selling price of at least $650k, maybe up to $700k.

Google Map It

Saturday, December 8, 2007

"Ultra Chic Urban Dwellings" in the Mission - Kevlar required?

This thread on SocketSite discusses the new development at 20th and Shotwell with its 6 spacious contemporary units, including 2 enormous 2700 sq ft penthouses priced very reasonably (in this market anyway) for the space.

Nice units overall but the penthouses stand out as unique. The point of contention here is the exact location within the mission - arguably one of the roughest spots that is smack-dab on the of boundary line between rival gangs (a bloody street, literally) and a 1/2 block from the fire station.

Bottom line - either you can live in the mission and handle it, or you can't - and you should live in Pacific Heights or the Marina where apparently no crimes ever happen.

Google Map It

Potrero Hill Fixer in contract - don't believe the pretty sketch

Wow. This piece of work was priced at $760k and is in contract within 2 weeks of listing. The 1044 sq ft 2 bed/1 bath SFR has dual garages holding up to 3 cars, or room for additional living space in lieu of car storage. The floor plan is strange and mostly dysfunctional in that old traditional way and needs full systems upgrades and likely should have walls relocated with a more modern layout.

If the purchase price is anywhere near the asking price, I see this as a terrible play. The comps aren't much more than the asking price here, and trust me when I say this is a major fixer that needs a minimum of $200k (more like $300k) in work to bring up to the $1M home the buyer is hoping for. If anyone knows more about this property, or sees something I am missing here, please enlighten me.

I know "the Hill" is desirable and all, but this particular locale is just around the corner from everyone's favorite public housing complex - the Potrero Hill Projects - where O.J. grew up. Oh how appropriate.

Google Map It

Friday, December 7, 2007

Downward spiral in Oakland beginning?

Jump down to the UPDATE on 721 Rosal.

2 good examples of the mess (for sellers/owners) in Oakland are highlighted by these properties currently for sale: 6690 Girvin (above) and 721 Rosal (below). Girvin was built in 2001 and sold for $855k in October 2004. It was listed for $1.249M (per zillow) as of 10/12/07 but currently is listed for $799k, an astonishing $450k drop. Rosal is in a fantastic neighborhood in Crocker Highlands hear Piedmont, and was also purchased for $855k (no relation to Girvin) in August 2005. It is currently listed for $829k after a 100k reduction and has been on the MLS for 35 days at the new price. Owners purchased with 100% financing. This is only the beginning, folks... and a major reason I have my radar on certain parts of Oakland for 2008-2009 purchases.

UPDATE 12/19/07: 721 Rosal has been reduced yet again to $749,950 - a total reduction of $180k from original asking price 3 months ago. The trustee sale is still scheduled for Thursday 12/20/07 so this seems to be a last ditch effort as a relist to get an offer before the bank buys it back.

UPDATE 12/9/07: 721 Rosal has been reduced for a 2nd time - now to $799k (down from $929k about 3 months ago). A trustee sale is also scheduled for Dec 20 on the Alameda County courthouse steps in Oakland.

An interesting visit to the vacant open house today revealed the location to be on the far Lakeshore side of Crocker Highlands (not bad, but not great) and the "stylish contemporary home" to be a strange mix of design including strange bright-colored plastic sheets as backsplash and wall panels (not kidding) in the kitchen and "media room."

A discussion with the listing agent revealed his belief that it comps at $850-860k right now - this after I commented on the downward direction of the market in Oakland. He disagreed, and then in true realtor sales-speak said "someone paid that much once, someone else will pay that much again." I was speechless, but then again not surprised. He not only subscribes to the idea of the greater fool but also the idea of the NEVERENDING greater fool! Cheap comedy.

He also claimed that it comped out at the original $929k asking price only 3 months prior. So he admits there has been a drop in "value" of approximately 70-80k in 3 months? But according to Mr. Real Estate Agent, there is no slowdown in Oakland. Of course not.

All asset bubbles burst, my friend. The air leaks slower in some (real estate). Fast in others (dot com bust).

Buy? Sell? Rent? Answer my question, jerk!

Sorry for the vulgarity, but this is one of my fave sports moments when John McEnroe yelled this at the chair umpire way back when....

So where do you stand? Are you a happy buyer, seller, or renter of San Francisco/Bay Area real estate right now? If you want to know my take on this, keep reading. If not, keep reading. Let me start with the wonderful notion that afflicts many desirable areas: "Real estate can never go down here - everyone wants to live here and they always will." Over time, sure - this may hold true. But for market timers and true followers there are times this is simply not true. The next several years is one of those times. San Francisco is holding up rather well thus far but that has been mostly a supply issue at this point, whereas Oakland and the other parts of the Bay Area are starting to implode. Terms such as "short sale" and "foreclosure" and "lender approval" are already running rampant there. San Francisco will follow suit in coming years. Like I said.... where do you stand? I wanna hear from you....

Noe Valley 3 unit: Fast Track or not?

This very nicely done Noe Valley 3 unit property consists of a traditional 2-flat building front with a large detached 2-story cottage in the rear. The owner/investor purchased the property in January 2007 for $1.35M and completed a $300k remodel via contractor before putting it on the market on November 9 for sale as 3 TIC units, or as a whole building.

The nicely remodeled flats (minus the popcorn finish walls and sliding-mirrored bedroom closets) are vacant with floor plan changes and 3 beds/2 baths each, while the rear cottage is tenant-occupied by a very protected tenant. The garage is a piece of art (if you appreciate that sort of thing) with steel beam upgrades and room for 4-5 cars.

The caveat to this deal is the tenant's status in the cottage - the 85 year old woman appears to be the only tenant and is no doubt a protected tenant, but her daughter claims to be living there and protected as well, which raises some questions, as records show she is married to a contractor and resides in another SFR in SF. Hmmm.... Alterior motive for the daughter? Ya think?

Regardless, this can be a nice score for buyers of the 2 flats if Granny buys the rear TIC, as the whole group can then enter the lottery immediately with no 3 year waiting period. Herein lies the opportunity.... but who do you believe? And don't forget if it doesn't pan out that way, Granny is protected at a cash-flow drainage-ditch rate of $397/month in the cottage, which really does need upgrades. Can be a nice opportunity if the cards fall right for this killer location..... or not.

Google Map It

Thursday, December 6, 2007

Intro to Me

After failing to coerce friends to jump into the San Francisco real estate market with me in 2003, I dove in by my lonesome. Since then I have become hooked on the subject and industry - got my RE license in 2004 (though non-practicing), continue to research the hell out of everything on the subject, and have bought and sold 2 properties in SF since. Let's just say I am happy to be a renter currently. I am a true market timer and contrarian/momentum investor, and I am downright elated to wait on the sidelines for the coming years when cash will be king and the proverbial blood will run in the streets. This is my blog... Welcome to Bloody Street.